Background to the TOFA reforms

 The TOFA reforms were first introduced in the 1992 Budget and were later taken up by the Review of Business Taxation (as recommended in the Ralph Report).  Stages one and two of these reforms were introduced in 2001 and 2003, respectively.  The recently introduced Division 230 (ITAA 1997) implements stages three and four of the TOFA reforms. 

In broad terms, the TOFA rules have been formulated with the intention that “financial arrangements” should be taxed in accordance with their economic substance.  Prior to the introduction of the reforms, the emphasis on legal form rather than economic substance resulted in inconsistencies between the tax treatments of different types of transactions (i.e. financial arrangements) that essentially had the same economic substance.  In part, this was contributed to by legal form-based rules that had not kept pace with financial markets and product innovations, creating tax deferral and arbitrage opportunities. 

The general rule is that a gain from a financial arrangement is assessable income; and a loss is an allowable deduction, to the extent it is made in the course of carrying on a business/ producing assessable income.  As a consequence, there is no longer a need for taxpayers to distinguish between gains and losses on revenue or capital account.

The four stages of the TOFA reforms deal with various concerns and purposes, as follows:

Stage 1 – new debt/ equity rules

Stage 2 – new foreign currency gains and losses rules

Stages 3 and 4 – new tax-timing rules for the taxation of gains and losses from financial arrangements; and hedging transactions (contained in Division 230) 

Division 230 provides a framework for the taxation of gains and losses from financial arrangements.  A set of principles and rules establish how to work out those gains and losses for each income year.

This article will specifically look at new Division 230 and what you should know if you’re a small or medium sized enterprise (SME) when applying the asset and turnover threshold tests and the consequences of the TOFA rules applying to you. 

The new rules will apply to financial arrangements that taxpayers start to have on or after 1 July 2010, unless they make a transitional election.  If a transitional election is made, the rules will apply to pre 1 July 2010 financial arrangements as well.

What is a “financial arrangement”?

In broad terms, a financial arrangement is one that involves a right to receive and/ or an obligation to provide a ‘financial benefit’ (i.e. anything of economic value).  Once the arrangement is defined, either it, or two or more separate arrangements, are then tested to determine if it is a financial arrangement to which Division 230 may apply, as discussed below. 

Section 230-45 provides that an entity has a financial arrangement if it has, under an arrangement, a ‘cash settlable’ legal or equitable right to receive or obligation to provide a financial benefit, or a combination of one or more such rights and obligations.  However, the arrangement is not a financial arrangement if under the same arrangement the entity also has a ‘not insignificant’ right or obligation to provide or receive something that is not a financial benefit, or not cash settlable.

Arrangements commonly regarded as financial arrangements are quite broad and include cash at bank, foreign currency, receivables, bonds, convertible notes, loans, interest rate and cross currency swaps, options, forward foreign exchange contracts, and shares in companies or units in unit trusts.

To determine if an arrangement is one to which Division 230 may apply, an entity (i.e. taxpayer) needs to work through the following steps:

Identify the financial arrangement/s

• Work out whether an exclusion provision applies to gains and losses from the financial arrangements
• Work out which tax-timing method will apply to the financial arrangement and, using that method, work out the gains and  losses from the financial arrangement for each income year
• Work out whether the gains and losses from the financial arrangement are assessable or deductible.

A key issue for SMEs will be determining whether an exclusion from the TOFA rules applies.

 Who is subject to TOFA? – Asset and turnover threshold tests

The application of Division 230 is mandatory for the following entities:

• Authorised Deposit-taking Institutions (ADIs), securitisation vehicles and financial sector entities, with an aggregated turnover of $20M or more in the previous income year
• Superannuation entities, managed investment schemes and foreign entities similar to managed investment schemes, if the value of their assets is $100M or more (worked out at the end of the previous income year)
• Other entities (not individuals) who meet any of the following thresholds in the previous income year
  • Aggregated turnover of $100M or more
  • Assets of $300M or more
  • Financial assets of $100M or more

(worked out at the end of the previous income year).

One or more of the above thresholds must be exceeded before the TOFA rules apply.

Once applied Division 230 will continue to apply to an entity even though the entity’s turnover or value of assets may subsequently fall below the relevant threshold.

If you are an SME you need to be aware of the following ‘traps’:

In applying the turnover threshold test,  in addition to your own turnover you will also need to take into account the turnover of any ‘connected entities’ and ‘affiliates’.  For example, if the taxpayer is a company that has received 40% or more of distributions of income or capital from a discretionary trust in a previous income year, the trust may be a connected entity of the company, such that the turnover of the taxpayer may include the turnover of the trust.

‘Turnover’ includes ordinary income derived from carrying on a business only, but it does not include amounts of ordinary income relating to dealings between the entity and entities that are connected with, or are an affiliate of, it.  Further, it does not include passive income, e.g. interest.

In applying the asset threshold tests, a taxpayer can use the values recorded in its accounts only if those accounts are prepared in accordance with applicable accounting standards.  If not, independent valuations will need to be obtained.

Regardless of the above threshold tests, Division 230 will apply to an arrangement held by the entity (including an individual) if the arrangement is a ‘qualifying security’ (e.g. promissory notes) with a remaining term of at least 12 months.

An entity (including an individual) can (irrevocably) elect to have Division 230 apply to it even if it doesn’t satisfy the above threshold tests.

In summary, these rules are complex and even if they don’t immediately apply to you they need to be tested annually.  Therefore, as your business grows, or in entering into new financial arrangements (i.e. qualifying securities) in the future, these rules may be applicable to you.

 So what if the TOFA rules apply?

 Division 230 contains a number of tax-timing methods that can be applied to work out when gains or losses that an entity makes from a financial arrangement should be brought to account for tax purposes.

If eligible, an entity can choose to apply one or more of the elective methods.  Otherwise, one of the default methods will apply to their financial arrangements.  The various methods (in order of priority) are as follows:

Elective methods

•  
  • Hedging financial arrangements
  • Reliance of financial reports
  • Fair value
  • Foreign exchange translation

Default methods

•  
  • Accruals
  • Realisation

These rules are complex and it is beyond the scope of this article to deal with the various scenarios and circumstances in which a particular elective method may be appropriate in preference to the application of a default method, to a particular financial arrangement.  To illustrate the options available to taxpayers, consider the following example.

 Example

Trading Co. enters into a foreign currency (FX) hedge contract on 29 June 2011, to hedge the Group’s FX exposure on the purchase of an item of machinery from a foreign supplier that is to be settled in FX on 29 July 2011.  For reporting purposes, the accounting standards require movements in the fair value of the contract to be recognised in Trading’s P&L for the accounting period.  Assume that Trading Co. is, and the FX hedge contract is a financial arrangement, subject to the TOFA rules.

If no tax-timing method election is made, any gain or loss on the FX hedge contract should be recognised (for tax purposes) when the purchase is settled.  This is no different to what would be required pre TOFA rules (i.e. Division 230). 

If a fair value election were made any fair value movements booked to the P&L would also be recognised for tax purposes.  For example, if the fair valuation of the contract at year end (30 June) resulted in a loss being recognised for accounting purposes, Trading would be entitled to claim a tax deduction for this loss in the income year ended 30 June 2011.  Conversely, if the fair valuation resulted in a gain, it would be included in its assessable income for tax purposes.

A fair value election would not be applicable if the contract was accounted for under hedge accounting rules.  In which case, Trading could make a hedging election, which would allow for the recognition of gains and/ or losses on the contract for tax purposes to be matched to gains and/ or losses on the underlying hedged item, which in this case, would be the effective life of the machinery acquired. For example, if Trading made a gain upon settlement of the contact of $100,000 and the effective life of the machinery is 10 years, it could elect to include $10,000 in its assessable income in each of the next 10 years, rather than recognise $100,000 in full in its assessable income upon contract settlement, in the income year ended 30 June 2012.

As can be seen, there are a potentially different outcomes depending on how a financial arrangement is accounted for and what tax-timing method elections can be made.

For a confidential discussion about how the TOFA rules may potentially apply to your business and its financial arrangements contact Pierre Wakim on 02 9683 7888.

The situation

Our client acquired two privately owned businesses that manufactured and distributed consumer goods similar to its own. The businesses operated through similar channels, selling a range of products to both small retailers and larger supermarket chains. The consolidated revenue of the group was $70 million p.a. Although our client had moved quickly to integrate the businesses operationally, separate management teams, financial and administrative systems and processes continued to co-exist.

The client had a small internal accounting team that managed the accounting and reporting requirements.  The team did not have the expertise nor the capacity, however, to identify and implement strategic initiatives across the combined businesses.

The onset of the GFC saw the business experience strong price pressures. They countered this by cost cutting, and streamlining operations. But, even with these measures in place, the business owner questioned whether more had to be done to manage the bottom line and ensure survival of the business.

How we helped

Younis & Co were asked to independently assess the financial and administrative systems and processes, including accounts receivables, accounts payables, general accounting, management reporting, IT and procurement functions, and to look for synergies across the operating businesses.

The task was undertaken by one of our people taking on the role and responsibility of ‘virtual’ CFO to the company.  Working across each entity, we developed a financial strategy for the business owner that addressed:

• The present situation of both businesses
• The position where each of the businesses should be
• The priorities
• The initiatives to drive each of the businesses to the desired position
• Measures and success factors

Solution

The key stakeholders accepted the financial strategy – its priorities, initiatives and measures. The strategy was implemented with little disruption to business,  the customer base and without pressure on existing internal resources.

For a confidential discussion about the range of services and benefits of a ‘virtual’ CFO to your business, please contact Pierre Wakim on +61 2 9683 7888.

The situation

A privately owned retailer considered acquiring another large retailer in a different geographical area. The acquisition would open a whole new market and the synergies were significant.

To fund the acquisition, they entered into an arrangement with a private equity partner. The private equity partner was concerned about the integrity and transparency of the company’s systems and controls, and the accuracy of their financial statements.  An audit of the company was sought before any capital raising began.

How we helped

Younis & Co were engaged to undertake the audit, within a tight non-negotiable deadline. This meant preparing the financial statements in a very short time frame. An added complication was several new complex business, accounting and tax issues, created by the company’s rapid growth, that were stretching the company’s internal resources.

First, we educated management on how to ensure that business systems complied with both accounting standards and the private equity partner’s requirements. Once accomplished, we reviewed business systems and processes, highlighting weaknesses and recommending ways to mitigate risks.

Solution

The audit process was completed within the timeframe set by the company and the private equity partner. System issues were addressed to a standard where the private equity partner was comfortable to pursue the capital raising and complete the transaction.

For a confidential discussion on internal and external audit needs, contact Pierre Wakim on +61 2 9683 7888.

The situation

Our client inherited a business and through her leadership and control oversaw substantial growth, generating revenues in excess of $50 million p.a.  Eventually, she wanted to pass on ownership and running of the business to her children, but she wasn’t sure when and how to do it.

She grappled with questions including:  Are my children ready?  Will they want to do it?  How will control be divided or transferred?  Are there ways to protect family assets in the process?  What are the commercial and tax implications of the various alternatives to be considered?

How we helped

Younis & Co worked with the client to develop a succession plan that considered two scenarios. The first looked at transferring the business to the children over several years, with majority control remaining with the client. The second involved sale to a third party, for the right price, with minority control remaining with our client.

Both scenarios involved establishing a board of directors; reviewing the company’s capital structure (voting and non-voting shares); forming trusts; establishing a self-managed superannuation fund; and protecting non-business assets from creditors or divorce claims. We also considered the potential implications for her children.

Solution

Our client decided on the second scenario – selling the business with an on-going minority shareholding. We assisted throughout the sale process, including:  the business valuation; overseeing the transaction; developing a tax-effective exit structure; and addressing the associated income tax issues  – at company and shareholder levels.

For a confidential discussion about succession planning involving a family business and the range of options, contact Charles Younis on +61 2 9683 7888.

The situation

The owners of a privately owned transport industry company were planning to retire within 5 to 10 years. From start up over 35 years ago, the owners had built a business that employed 10 people, generated an annual turnover of over $3 million and a net profit of approximately $500,000 p.a. Now they wanted to find out how to protect their business wealth, leverage their investment in the business and, combined with their personal wealth, plan a comfortable and independent retirement.

How we helped

Together with the client, Younis & Co developed a comprehensive tax plan for the next five years that included minimising tax, leveraging small business CGT concessions and maximising employer contributions to their self-managed superannuation fund to enable the fund to purchase certain business assets.

Solution

As a result of proactive tax planning, the client’s super fund amassed sufficient funds to acquire many of the business assets including a factory.  This enabled the client to buy a retirement residence without the need for borrowing. Capital Gains Tax was minimised through accessing available small business CGT concessions.

For a confidential discussion about how to effectively plan for retirement leveraging your business’ financial position, contact Charles Younis on +61 2 9683 7888.

A discretionary trust has traditionally been used by families as the most appropriate structure for:

• Holding family business and/ or investment assets
• Protecting these assets
• Achieving legitimate tax planning benefits,

for current and future generations.

The use of trusts for business and investment purposes has increased significantly over the past five years, with the use of hybrid trusts in particular becoming increasingly popular, due to the flexibility that can be achieved in some cases.

Recent Court decisions however, most notably Bamford v Commissioner of Taxation [2009] FCAFC 66 and Forrest v Commissioner of Taxation [2010] FCAFC 6, tell us that the tax effective use of trusts is not beyond doubt, or open to challenge from the Commissioner of Taxation (“the Commissioner”).

The purpose of this article is to examine the implications of the Forrest decision in particular, with respect to the tax benefit of negatively gearing investments through the use of a hybrid trust – which cannot be achieved with a discretionary trust. 

In considering the use of a hybrid trust taxpayers should be aware that each hybrid trust model is different and is open to being interpreted differently by the Courts, giving rise to different tax outcomes. 

Taxpayers should proceed with caution, and be confident that implementing a hybrid trust structure is appropriate for the purpose for which the trust is to be established – for the benefit of its intended beneficiaries (!).

What is a hybrid trust?

A hybrid trust is essentially a trust with the features of both a fixed (e.g. unit) trust and a discretionary trust.  Hybrid trusts come in a variety of forms.  There is no standard or accepted form of a hybrid trust.  They all work differently and consequently, all have different tax implications. 

A typical hybrid trust will provide specific beneficiaries with a fixed entitlement to some or all of the income or capital of the trust (normally by way of issuing units to specific beneficiaries), while giving the trustee a discretion as to the distribution of income or capital to a broader range of (discretionary) beneficiaries.

A particular style of hybrid trust was considered by the Full Federal Court in the Forrest case, as discussed below.

The Forrest decision

Mr Forrest was a shareholder and Chief Executive Officer of Anaconda Nickel Ltd, an ASX listed company (“Anaconda”).  He was also a unit holder in the Minderoo Trust (“the Trust”) that held a large number of shares in Anaconda.  He had borrowed money to acquire the units and claimed interest expenses in relation to the loans.

The Trust was considered to be a hybrid trust in that it was expected to be receive revenue (“fixed”) income (i.e. income other than realised and unrealised capital gains) that was to be distributed to the unit holders and also capital gains – that was to be distributed to the discretionary beneficiaries, at the discretion of the trustee.  One of the provisions of the trust deed indicated that the trustee had a power to treat any income as income of any type.  In this respect it appeared that fixed income could be treated as discretionary income and vice versa.

The Commissioner disallowed the interest costs claimed as a tax deduction in relation to the purchase of the units in the Trust.  The Commissioner considered the Trust was a discretionary trust and there was no certainty that any income derived by the Trust would be directed to Mr Forrest (because of the power to treat any income as income of any type).  Accordingly, it was considered that there was not sufficient nexus to the gaining of income for the interest expenses to be deductible.

Mr Forrest claimed that the Trust was a fixed trust and that he was entitled to the income of the trust in proportion to the units that he held.  He also claimed that, even if it were found that the trust was discretionary, it was the intention of the trustees to distribute the income to him and therefore the interest expenses were deductible.

The Court found that the income of the Trust, other than realised and unrealised capital gains, was held on a fixed trust for the unit holders and it followed therefore that the interest payments are deductible.

The Commissioner submitted that, if Mr Forrest was successful in his appeal to the Court on the deductibility of interest, the matter should be remitted to the Administrative Appeals Tribunal (AAT) to consider the question of apportionment.  The Court decided that the right to appeal against an AAT decision is only available on a question of law and as the Commissioner had not raised this issue before the AAT, it could not now be raised.

The Court did not consider whether there was any merit in the apportionment contention.  This is an important issue that remains unclear. 

The ATO’s response

Whilst the ATO accepts the finding of the Court, it is likely that the matter will be appealed to the High Court.

In the ATO’s opinion, for procedural reasons the Court did not consider whether the Commissioner was correct to contend that the interest expenses should be apportioned between their income producing and non-income producing purposes, as discussed in Taxation Determination TD 2009/17. The Court’s decision therefore does not require a review of the position stated in that Determination.

Tax planning considerations

For a confidential discussion regarding the use of hybrid trust structures and whether it may be appropriate for you, please contact Pierre Wakim on 9683 7888.

Gearing investments through the use of a hybrid trust – Proceed with caution

A discretionary trust has traditionally been used by families as the most appropriate structure for:

• Holding family business and/ or investment assets
• Protecting these assets
• Achieving legitimate tax planning benefits,

for current and future generations.

The use of trusts for business and investment purposes has increased significantly over the past five years, with the use of hybrid trusts in particular becoming increasingly popular, due to the flexibility that can be achieved in some cases.

Recent Court decisions however, most notably Bamford v Commissioner of Taxation [2009] FCAFC 66 and Forrest v Commissioner of Taxation [2010] FCAFC 6, tell us that the tax effective use of trusts is not beyond doubt, or open to challenge from the Commissioner of Taxation (“the Commissioner”).

The purpose of this article is to examine the implications of the Forrest decision in particular, with respect to the tax benefit of negatively gearing investments through the use of a hybrid trust – which cannot be achieved with a discretionary trust. 

In considering the use of a hybrid trust taxpayers should be aware that each hybrid trust model is different and is open to being interpreted differently by the Courts, giving rise to different tax outcomes. 

Taxpayers should proceed with caution, and be confident that implementing a hybrid trust structure is appropriate for the purpose for which the trust is to be established – for the benefit of its intended beneficiaries (!).

What is a hybrid trust?

A hybrid trust is essentially a trust with the features of both a fixed (e.g. unit) trust and a discretionary trust.  Hybrid trusts come in a variety of forms.  There is no standard or accepted form of a hybrid trust.  They all work differently and consequently, all have different tax implications. 

A typical hybrid trust will provide specific beneficiaries with a fixed entitlement to some or all of the income or capital of the trust (normally by way of issuing units to specific beneficiaries), while giving the trustee a discretion as to the distribution of income or capital to a broader range of (discretionary) beneficiaries.

A particular style of hybrid trust was considered by the Full Federal Court in the Forrest case, as discussed below.

The Forrest decision

Mr Forrest was a shareholder and Chief Executive Officer of Anaconda Nickel Ltd, an ASX listed company (“Anaconda”).  He was also a unit holder in the Minderoo Trust (“the Trust”) that held a large number of shares in Anaconda.  He had borrowed money to acquire the units and claimed interest expenses in relation to the loans.

The Trust was considered to be a hybrid trust in that it was expected to be receive revenue (“fixed”) income (i.e. income other than realised and unrealised capital gains) that was to be distributed to the unit holders and also capital gains – that was to be distributed to the discretionary beneficiaries, at the discretion of the trustee.  One of the provisions of the trust deed indicated that the trustee had a power to treat any income as income of any type.  In this respect it appeared that fixed income could be treated as discretionary income and vice versa.

The Commissioner disallowed the interest costs claimed as a tax deduction in relation to the purchase of the units in the Trust.  The Commissioner considered the Trust was a discretionary trust and there was no certainty that any income derived by the Trust would be directed to Mr Forrest (because of the power to treat any income as income of any type).  Accordingly, it was considered that there was not sufficient nexus to the gaining of income for the interest expenses to be deductible.

Mr Forrest claimed that the Trust was a fixed trust and that he was entitled to the income of the trust in proportion to the units that he held.  He also claimed that, even if it were found that the trust was discretionary, it was the intention of the trustees to distribute the income to him and therefore the interest expenses were deductible.

The Court found that the income of the Trust, other than realised and unrealised capital gains, was held on a fixed trust for the unit holders and it followed therefore that the interest payments are deductible.

The Commissioner submitted that, if Mr Forrest was successful in his appeal to the Court on the deductibility of interest, the matter should be remitted to the Administrative Appeals Tribunal (AAT) to consider the question of apportionment.  The Court decided that the right to appeal against an AAT decision is only available on a question of law and as the Commissioner had not raised this issue before the AAT, it could not now be raised.

The Court did not consider whether there was any merit in the apportionment contention.  This is an important issue that remains unclear. 

The ATO’s response

Whilst the ATO accepts the finding of the Court, it is likely that the matter will be appealed to the High Court.

In the ATO’s opinion, for procedural reasons the Court did not consider whether the Commissioner was correct to contend that the interest expenses should be apportioned between their income producing and non-income producing purposes, as discussed in Taxation Determination TD 2009/17. The Court’s decision therefore does not require a review of the position stated in that Determination.

Tax planning considerations

For a confidential discussion regarding the use of hybrid trust structures and whether it may be appropriate for you, please contact Pierre Wakim on 9683 7888.

New tax rules apply from 1 July 2009 with respect to the tax outcomes for employers and employees participating in pre and post 1 July 2009 employee share and option schemes.  These rules are complex and have many employers and employees wondering whether it’s worth the “trouble” to implement and administer these schemes on an ongoing basis.

‘In broad terms, the new rules mean:

• the employee no longer has a choice as to whether to be taxed upfront or on a deferred basis – this will be determined by how the plan is structured and/ or on the employee’s equity stake in the company
• an increased cost of compliance/ administration for the employer company.

As a consequence, an increasing number of business owners are considering the merits of implementing “phantom” share and option schemes – as part of their overall compensation structure – to motivate, attract and retain their employees.

The purpose of this article is to highlight some of the key features of phantom share and option schemes and issues to be addressed in their implementation.

Why would you consider implementing a phantom share or option plan?

Employee share and option schemes are a great way to align the interests of the business with the interests of your employees.  However, in a private company context this is not always desirable or practical for a number of reasons. 

For example, some business owners are not comfortable with diluting their equity and the subsequent loss of full control.  Employees can only benefit where they are able to sell their shares and realise a profit.  In a private company this would typically mean a sale to the other existing shareholders, new shareholders, or back to the company. 

Such issues and/ or transfer of shares and options would need to be cognisant of relevant regulatory obligations under the Corporations Act and the tax rules applying to employee share/ option schemes, as noted above.

Phantom share and option schemes can overcome many of the complexities associated with traditional employee share and option schemes.  No shares are actually issued or transferred to employees.  As a consequence, there are no regulatory requirements to be met. 

How would it work?

Phantom shares or options are simply a contractual agreement between the company and the employee, for the employee to be paid a certain amount (i.e. bonus), based on the company’s profitability or increase in value, over a period of time.  The bonus may be paid in cash, real shares, share options, promissory notes or other consideration.  As a consequence, administration costs are minimal, as the arrangement may be executed by way of an addendum to the employee’s employment contract.

Phantom share and option schemes may be designed in a number of ways, to achieve the desired benefits.  With phantom shares the employee receives the underlying value of the shares, as well as any increase in their value.  With options, the employee receives only the increase in the value of the underlying shares.

For example, consider the case of an employee given a 2% phantom shareholding in a company.  The terms of the arrangement may provide that for every $70 fully franked dividend paid by the company the employee would be entitled to a $2 bonus in respect of that year (i.e. $70 dividend + $30 company tax X 2%).

Assume this 2% shareholding equates to 100 phantom shares, with a base price of $1.  If the company were sold in the future, the terms of the arrangement may provide that the employee would be entitled to a bonus payment equal to 2% of the sale price.  Assume this sale price translates to a market value per share on the exercise date of $2.  On this basis the employee would be entitled to a bonus payment of $100.  If the market value of the shares on the exercise date is $3, the employee would be entitled to a payment of $200.

What issues need to be addressed?

In designing the right plan for your company the following matters need to be carefully thought through; discussed amongst the business’ stakeholders before being presented to eligible employees for consideration; and appropriately documented:

• Classes of shares and their rights
• Quantity of shares, options to be issued
• Employee eligibility criteria
• Valuation of the company/ shares/ options (year on year)
• Vesting criteria
• Conversion/ exercise criteria
• Holding period
• Payouts
• Transfer restriction
• Accounting
• Funding

‘What if’ scenarios, e.g. ‘what if the company raises additional share capital? – are phantom share entitlements diluted on a pro rata basis?

 Tax planning considerations

Typically, no tax issues should arise until the employee receives a payment (i.e. benefit), at which point the tax is deducted under the PAYG system (and remitted to the Tax Office).  All payments to employees should be fully deductible to the employer company.  If appropriately structured with respect to the matters noted above, the employee should be able to effectively defer payment of tax on this benefit until there is a “trigger” event (e.g. the employee’s retirement) requiring payment of the benefit to the employee.

Please note, if the benefit is to be provided to the employee in the form of real shares, the amount of the gain/ value to the employee at this point should be taxable as ordinary income.  Any subsequent gain on a sale of these shares should be taxable as a capital gain.

For a confidential discussion regarding phantom share or option schemes and whether it may be appropriate for you, please contact Pierre Wakim on 9683 7888.